Robert Wolf

How important were his relationships with folks on Wall Street to begin with? He did get a lot of funding. It sort of helped start his campaign really. So what was his relation with the folks on Wall Street, and how important to him were those relations?

I think that certainly financial services is a large part of the economy, so of course you have to engage with the financial service sector, whether it's real estate, Wall Street, commercial banking, investment banking, insurance, all those different avenues. Secondly, for Democrats, New York and California, or the Tri-State area and California are key, as was Illinois for him, but those were really the three big key states for fund raising. And so you have to engage New York, and at that point you had Hillary, Sen. Clinton [D-N.Y.], and you also had Sen. [Christopher] Dodd [D-Conn.] running and some others in the Tri-State area, so he had to come often and meet people and engage.

I also think at that time, I believe I held the first fund-raiser for him in New York, which was in March '07, and, I don't know, we probably had a couple hundred people there, at $2,300 a clip, I think it was at the time, or $2,100. I forget what it was. And listen, people remember Sen. Obama from the famous speech he did at the Boston [Democratic National] Convention where he really brought the house down, and people wanted to meet him.

I'm not sure at that point whether he was being taken that serious as the next presidential candidate. I'm a Wall Street guy, so I look at in-trade. I think Hillary Clinton was running at 70 percent, and he was probably running at 1/10 of a percent. You had [then-Sen.] Evan Bayh [D-Ill.]; you had a lot of -- [former Sen. John] Edwards [D-N.C.], he was running 8 or 9. But people wanted to get to know who then-Sen. Obama was, because he was viewed as an exciting visionary for this country that people wanted to engage with. So it was not difficult getting people to meet Sen. Obama at that point.

I'm going to jump ahead and jump all over the place just to make sure we cover everything. ... You're sort of renowned for seeing troubles maybe before some others saw them, or at least understanding it a bit more than others. I want you to talk a little bit about what you saw, why you sort of saw troubles coming ahead. And then there's the famous memo that you wrote to other folks at UBS [Investment Bank] after coming back from dropping your son off at camp that July. Talk a little bit about what you saw and what you wrote down in this memo, why you wrote that memo.

It's interesting. So for most of my career until '04 I was always in sales and trading on the fixed-income side, so I was really a trader almost my entire career, and then 2004 at UBS I became chief operating officer, and then I eventually became president in late '07 when we were going through the real tough times at the firm and on the Street. But in mid-07 I was at a few different risk meetings for the firm, and I haven't been that close to the risk for a few years, and our leverage was very high; leverage at other institutions [was] getting high; people were talking about these Level 3 assets that I really never heard that much about before, which is things that you can't price on your balance sheet.

And I kind of felt like, OK, since the days I was trading, our goal was to be a boutique on steroids, be very nimble, be quick, be large, and do what you do well, but don't be everything to everyone everywhere. And then the Wall Street firms started getting much bigger and became -- they were on 100 exchanges, and they were in 50-plus countries, and the big firms did it with balance sheet and leverage. And it kind of felt to me like we were getting to this situation where I felt that firms were overlevered. We had a great 10-year run with growth, and it just felt to me that I had this gut feeling like things were going too well.

And then all of a sudden you started to hear the housing market start creaking a little, and it felt like there was going to be a real game change on the street. And then at UBS we mark to market; we have different accounting than the other competitors. We don't use gap accounting; we use IFRS [International Financial Reporting Standards] accounting, and we were one of the first shops that were going to show a billion-dollar loss. Well, a billion-dollar loss in sales and trading is pretty big, and that's an understatement.

And then you felt like things started getting stale. Positions started getting stale; you started to see liquidity dry up a little. And at that point -- we're in a business about liquidity. That is really our lifeline, funding ourselves and liquidity, and once you start seeing liquidity dry up and once you start seeing losses starting to come in larger numbers than you've heard before, there was a little nervousness.

So really, my view was I felt like things were starting to slow up. Most people felt like growth was going fast. Everyone had a view that the Fed was going to continue to stay neutral or hike rates. And for me, I felt like I disagree. I think we're going to get in a slowdown. I kind of think you're going to see the Fed start turning the other way. We really didn't have inflation. And so I kind of had a different view, and that's kind of culminated to kind of what's become a fun story to talk about the day of his birthday.

So take us to then August. So things are getting worse. The housing market, everybody is realizing, is a problem that's not going to go away. Take us to what you were doing, where you were going, what was going on, and the conversations that sort of sent up all the red flags for you.

So all of a sudden July comes, and you get defaults in housing at a standard deviation versus the norm. Usually it was very small defaults, and all of a sudden you had it five, 10 times of what normal was. And recall at that time you had subprime, you had prime, you had all different types of housing finance going on. And then, like I said, UBS was looking at their own positions and started seeing that we had our own problems. And I think a lot of firms were starting to have problems where, you know, our goal as an industry is to be in the moving business, not in the warehouse business, and when things get less liquid, all of a sudden you get in the warehouse business. And so our position started to get more aged. And then the first week in August has kind of been a fun weekend. That's my wife's birthday, and a few days later it's Obama's birthday, so we exchange calls, so on and so forth. And he called my wife -- it was Aug. 1 -- for her birthday.

And then my wife and I were going on my friend's boat, who is a good friend of mine, worked at a hedge fund. And we started talking, and he was having his problems at the hedge fund on funding and on pricing, and at the same time I saw the bigger firms starting to have some problems, housing was starting to creak a little, and I just started to say to myself, "If I'm seeing this right, we're going to have some mass disruptions coming." And it just felt that way.

And I called the president that morning for his birthday, and jokingly: "Hey, happy birthday, Barack. Thanks for calling my wife."

Tell me in more detail. So you're on the yacht? Why do you decide to call him? Where do you go on the yacht? What else is going on?

So we had really just docked on the yacht. It was the morning we were going onto the boat, and I wanted to call him before he started his day with his family for his birthday, and so I just called him and said: "Hey, Barack, I wanted to wish you a happy birthday. Hope you're going to have a great day, but I just want to talk to you about something." And for the most part until this time, I was a fund-raiser. We talked a little about business and family and other things, but I would have said that I was one of the key fund-raisers. And then I would say that birthday kind of flipped the switch, where I moved from being a fund-raiser to I would say one of his key economic advisers. I would portray it that Austan [Goolsbee] was really his economic guy and I was his financial markets guy, and the three of us started talking very often since that day.

And I called him and said, "Listen, I know that the debate today has been all about the war and foreign policy, but I'm telling you it feels to me like we're going to go back to the Clinton time where it's all about the economy, and let me give you my reasoning." And I started telling him that UBS is going to show big losses, a couple hedge funds may be liquidated, and you're going to start seeing -- it feels like there could be a bit of a contagion of a real deleveraging going on. Everyone is long housing and commercial real estate. Consumption at this country is 70-plus percent of GDP [gross domestic product], so you could see that psyche change a little.

And we started having a good conversation. He said, "You know what?" At that point, "Hey, Robert, we need to talk; we need to get you involved with Austan." And from that day on we started talking very, very often. I don't know if it was once a week, three times a week, five times a week, e-mailing back and forth, but from that time on we started talking about the markets and the economy nonstop. And then, obviously, the next big thing was the Lehman situation.

... What's his reaction? So you're on the telephone saying: "I've got a buddy here who has got some problems going on in Europe right now. I've been seeing stuff back at the office. I've got to warn you here." What's his reaction to this?

I think his reaction, one, he was thinking about what I was saying. He asked a few questions about the leverage and the size of the losses. And remember, UBS was 50 times levered at that point, but we weren't alone. All the firms were 35 to 55 times levered at that point, and everyone had different -- how they marked their positions was different. But let's just say if a company is levered and X percent of their book, 15 percent of their book is Level 3 assets, then you have a big part of your position that you just can't figure out how to mark.

And so I think it was not an awakening. I mean, this guy, the president was very savvy on business issues, so he asked the right questions right away. We talked about leverage, and we talked about pricing, and we talked about the losses and things like that. But I think for both him and I [sic], it was a moment that was a bit of a wow moment, because the truth is that soon thereafter the unraveling began. And we were talking about this possibility happening for probably 30 days before the Lehman crisis took hold.

Let's skip on. In between, after Bear [Stearns] is the Cooper Union speech. You were involved in helping the senator at that point write the speech. What was the background of why he gave that speech, your involvement in it, why it was important for him to lay that on the table at that point in the campaign?

So the president gave two speeches that were pretty visionary if you kind of look backward. It was the NASDAQ speech and the Cooper Union speech. I was obviously involved with helping him think about some of the ideas, as well as others were. I actually went down to the Cooper Union speech with him in his car. We met that morning at a Midtown hotel and just spoke about a bunch of things. And after his Cooper Union speech he also had a bunch of interviews on business that day.

Tell us about the car ride, though. What were you talking about in the car?

On the Cooper Union -- the president at that point, when we were going in the car, he was talking about really the idea of reg reform, pre-Dodd-Frank [Wall Street Reform and Consumer Protection Act]. It was the idea of making sure that the ethics of Wall Street was pure and that we were doing the business that we should be doing. And he was also talking about the economy, and he was really the first one of all the then-nominees to really start talking with the business community about the economy. Everyone was still a little more on the war.

We were talking at that point about the housing market. We were talking about [it] a lot, because the housing market started to unravel, and we were talking a lot about regulatory and reg reform. Those were kind of the key things.

Was there an understanding that, "My God, this thing could implode; the housing bubble might burst" and all of a sudden this campaign, this next term, whoever wins is going to be dealing with this big time? Is there that understanding at that point?

I think then-Sen. Obama felt like he needed to get ahead on the debate on the economy. I believe that he was grasping a real understanding of the big banks, the leverage in the system, and I felt like he understood that a lot was predicated on the housing market. So the conversations that we were having, along with Austan and a few others, I mean, we would get into the granularity. We would talk about derivatives and we would talk about the housing market and we would talk about Fannie [Mae] and Freddie [Mac].

So, from a guy who has been in this industry for at that point 27-, 25-plus years, there's no question that he was asking the right questions. It was making us think a lot. We were all doing a little extra research, knowing he was going to be calling us. I was reaching out to economists and research analysts about, "Hey, if this happens, what would that mean?," so on and so forth. But this was all leading up until the Lehman weekend.

So take me to the speech. Tell me the effect the speech had, how you thought it went. [Former Fed Chair Paul] Volcker is there, too, and the importance of Volcker being there, standing behind him.

I mean, from where I sat, it was a fantastic speech, because he was sitting in the heart of the world financial center, talking about regulation before we started talking about regulation. The last real regulation was in the 1930s, so he was bringing this up, in some ways in a real visionary perspective. And then, let's face it, to have Paul Volcker and [former Securities and Exchange Commission Chair] Bill Donaldson in the front row, [New York City] Mayor [Michael] Bloomberg, real stalwarts of the industry in the front row, as well as all the CEOs around Wall Street there as well, I mean, that's a major statement.

And then all of his interviews afterward, all of them were about the economy. And I think it was a real pivotal moment for him where he was getting ahead of the pack, being able to talk about financial services. And I know that the people in the financial services were starting to give him a lot more respect of understanding what they were going through at that point. So it became, I think, like I said, a real pivotal moment for him where he was able to talk the talk and walk the walk in the financial service sector.

What did it kind of feel like at that point to sort of understand some of what was going on, and yet not a lot of people were really talking about it?

I think that at that point in time, it's not as if we all of us talk among each other on the Street. We don't really talk our books. We talk quarterly. Our CFO comes out and tells us, tells the marketplace how we're doing. So it's not as if we're all a team. We are what I would call friendly competitors, and I am always of the belief I hope everyone does well, because we're probably doing well also. Some people feel like, "Well, I'm always competing against you head-on." So everyone has a little different view of how they look at the street.

So there's not a lot of collaboration. Most of our collaboration would be we talk to our regulators, and if they decide to bring us together to have more group speech, then that's fine, but it's not as if we're reaching out to each other to talk about our risks. Actually, that seldom, if ever, would happen.

So I think that in some ways everyone didn't really know each other's risks. I mean, I can take UBS. Most people probably didn't think we were 50 times levered. Most people would not have known that a lot of our funding was overnight or short-term paper. And similarly, we would not have known that Citigroup had SIVs [also called "sieves"], off-balance-sheet [structured investment vehicles].

So let's go to Lehman. How do you first hear? How are you brought into the meetings? And what are your expectations walking through the door?

I believe it was the Friday afternoon I received a call, my guess is around 2:00, 3:00, from the Fed, saying, "Robert, we'd like you to come down to the New York Fed, if you can be there by 5:00," or something. And I asked what it's about, and they said, "Well, I'll call you right around the close and let you know." So I said, "I'm on my way down." And they said, "You can take one person." So I took our chief risk officer, and we went down to the Fed. And I spoke to them in between on my way down, and they said, "It's about one of your competitors." I had a little idea but certainly wasn't sure.

And we walked into a room at the New York Fed, and you had about a dozen different CEOs there, and then you had the CEOs of the region for the foreign firms there.

And who do you have from the Fed?

And then you have in there Tim [Geithner] from the [New York] Fed, you have Henry Paulson as the Treasury secretary and Chris Cox from the SEC, as well as some other people of their staff there as well. And it was very clear. It's that: "This discussion is about Lehman Brothers, and on Sunday night they'll either be a viable institution or not. And we need to figure out how to work together to make this work."

And I'm not sure exactly how Hank said it, but it was also that there's not going to be able to have government intervention like the Bear situation, so it will be different.

So the role of moral hazard, how did that come into play?

I think when that was said, it was a bit of a surreal moment for everyone. Now, all of a sudden, we are all working together. My guess, the last time I recall working together with the group was Long-Term Capital [Management], which I knew the group well, one, because I was from Salomon Brothers, but also UBS was one of the big equity holders in Long-Term Capital. But since then there's been very few opportunities where the group -- on a positive note -- very few opportunities where the group has come together to say, "OK, we have to work in a crisis mode together and do what's best for the industry and the country."

And we started. We would get some information on Lehman, the balance sheet, their risks. And then there were a few possible bids at that point, which made us realize that we have a lot of work to do, because I think one bid was like, "I'll pay --" and these were soft bids, but -- "I'll pay a billion or $3 billion, but I won't take $70 billion of their assets." So then, all of a sudden, "OK, well, if we have that bid, how do we fund the $70 billion gap?" And the $70 billion was Lehman had $40 billion of commercial real estate; they had I think $20 billion of nonconforming mortgages and about $10 billion of private equity. I'm roughing it, but that's kind of where you got the $70 billion.

And then there was another bid that came in maybe a day later that, "I'll pay $3 billion and won't take $50 billion of assets." So at the end of the day, [what] we needed to figure out from a group is if there's a bid and there's a gap, how do we engage in filling that gap? Is there something we could or couldn't do? And we were working together on ideas with the regulators in the room, with the regulators outside the room.

When do you call Obama? When do you sort of say, "Maybe I should talk to--"?

So I was speaking to the senator all along during that three-day period, but not that dissimilar to -- I was speaking to him prior to that period as well, although there were probably a few more calls that day than other days. He was privy to the meeting, based on, you know, everyone heard about the meeting. So, one, he was privy to the meeting; two, I believe he may have engaged Paulson or people at the Fed at that time. I think it may have been Paulson.

But I was letting him know that, "Listen, this is what could happen." We weren't talking as much about Lehman being saved, because if Lehman was saved and everything was fine, then it would be good. His questions were much more directed: "OK, what if Monday opens up and the announcement is a Lehman filing?" So when we started talking Friday night, he was asking the tough questions, not the rosy scenario. He was trying to figure out, "Well, what if it went the other way?" And the truth is, there was a lot of guessing going on. No one knew exactly what would happen that Monday morning.

For me, which [is] why, you know, we chatted earlier, why I think there's need for new regulations and a systemic regulator is as much as we talked about Lehman, for the most part neither the Fed nor the Treasury was the Lehman regulatory; it was the SEC at the time. I'm not so sure that they had the tools to be the regulator for a global financial institution like Lehman, who has a trillion-dollar balance sheet 35 times levered.

But you had Long-Term Capital happen. You had the Bear weekend go down where both times they were able to within Wall Street and with help from the Fed to save the day. Why was there no plan?

Well, I think a couple things, which is why we go to the Dodd-Frank, and really the key parts that they're trying to work out. One, just to go back, I think you may have had a different outcome if Sunday night was Merrill Lynch saved, a Lehman filing, but something about AIG as well. There was that big elephant in the room for those 72 hours that no one discussed, which was AIG. All of Wall Street knew AIG had problems. My guess is the regulators knew AIG had problems, but they didn't have a regulator that had control of AIG that was at that table, and they didn't have control, the Fed nor the Treasury, of AIG.

So I do think that in some ways, when you look at the Dodd-Frank bill and you look at the five silos of the Dodd-Frank bill, a systemic regulator, I think, is crucial for the future success of our industry, because you need to know more than what the bank holding companies are doing; you need to know what some of the large insurance companies are doing, and other financial services.

The second thing is a resolution authority is key. So how do you wind down a global interconnected financial institution that's in a myriad of countries that have all different jurisdictions? So a resolution authority is key.

But at that time there were no tools. As things started to fall apart, Bank of America was going with Merrill, Barclays wasn't a possibility, what was the feeling in the room? What was the conversation that you were having with Obama about "You know what? We're in some trouble here"?

I think when we chatted on Sunday, I think it was a call where it was kind of a wow call: "Listen, Senator, Barclays pulled out. The U.K. government said no for the most part. There was an uncomfortable feeling of taking something on as big as Lehman without knowing really what's under the hood and how would they fund it and how would this would impact Barclays and this general system." And I said to the president, then-senator, we were talking, and he goes: "Well, what does this mean? What happens at the open?"

And I think none of us felt good about the open. No one knew whether it would be contained or not contained. There was a feeling that at that point, we were kind of trying to make sure we got our own funding that we needed, and that we could open and get our repos done and get the things we needed to do. And I would say at midday it's kind of, it was almost like, "OK, let's make sure we're protecting our own castle and getting our operations ready for that Sunday night of something we've never gone through before."

But the senator was asking about, "OK, well, what do you think this means?" And we were talking about AIG. Sunday night, [he] and I talked about AIG, and what does this mean for AIG, considering everyone knew they were the big elephant in the room. He was asking what type of contagion this would have, and I was clear that, from my perspective, although we had never seen anything, "I think immediately we will see the markets and funding start to dry up, you'll see a lack of liquidity, and we're going to be in a situation of the unknown." And the one thing about Wall Street is we can do very well in the known. Good or bad, we do well with clarity. In the unknown, things tend to freeze.

And that's kind of what happened. The markets started to freeze. People were nervous about other firms. Our funding at our firm and other firms started to -- everyone started to get nervous. The overnight commercial paper market became very tenuous. So we had a situation that got a little nervous, no question.

And then soon thereafter, the president -- then-senator, excuse me -- we had a call that week about AIG. I remember that he put a call together for us to talk about AIG, because during that week, I think it was at that point [New York] Gov. [David] Paterson had an announcement that they're going to give a loan of $20 billion to AIG, but most of the market knew that that loan wasn't anywhere near the size needed. And all of a sudden you started having nervousness about a run on AIG, and what did that mean.

And the president put a call together. It was myself and Volcker and I believe Robert Rubin and Larry Summers, [both former Treasury secretaries under Clinton], where we were talking about, "OK, what would happen if the contagion starts in on AIG?" And then we started to have calls the next week on -- it may not have been the next week -- but on Fannie and Freddie and how does this hit the agencies that do a lot of housing. So what I would tell you is this president was engaged before Lehman, but once Lehman hit, I think he was all over it, thinking in a proactive and prospective way of how this was going to impact the economy and the election.

And he knows at this point that if he wins the election, all of a sudden his first term is a completely different animal than he expected it to be. The goals of his first term had just been superseded, I suppose. I mean, is there a feeling of that?

I would say that the president -- the senator -- was very confident he was going to win the election, and so certainly he wanted to, one, get up to speed on what he would be inheriting, but two, the debate was going to turn to all about the economy, and so he was also getting prepared on the debate. He actually did debate prep right in the office next to me here at 1285, and when they were doing the debate prep, he was getting into real detail on understanding the agencies, the big banks, the contagion effect. And from where I sat, calling him a quick learner is an understatement. He got it very quickly and knew exactly what to start asking. ...

One of the things that Geithner brought with him was this attitude of "Do no harm." Just explain that, and maybe in a way that people will understand.

I know that there's a lot of debate that has gone on: Should they have nationalized Citi? Should they have taken the agencies on their book, as opposed to conservatorship? And there's a lot of debate on what was the best course of action. I actually think they've used the best course of action based on the tools they had at that time, because I don't think you nationalize a Citi when you're not sure what day two means. So I think that at the beginning, during that period of time, you take what I would call prudent risk; you don't take wild risk.

So I think when you think about what the president has done and Secretary Geithner, and they did the stress tests and they did the recapitalization, I actually think it's worked well, and I think there's a lot of liquidity in the system. So, on the Fannie-Freddie thing, that's a tougher conversation, because the housing market hasn't come back, and right now 90 percent of mortgage origination is still going through them. And I think we all agree that we need to do more work on the housing market and come out with a better next course of action.

But I do think, in retrospect, not making quick decisions and rash decisions has paid off well for this country, and I think the policies have boded well to get the financial services up and running again.

Dec. 16, 2008, they have this big Chicago meeting all day long, and I guess Goolsbee and the vice president, everybody is there basically.

... So, going into 2009, the big debate was about the size of the stimulus. I think it was mid-December. I was not at the meetings with them, but certainly I was aware of the discussions happening.

Where I sit, I'm a little more Keynesian by nature, so I would have liked to have seen north of a trillion, as opposed to the 700 -- I think it was $89 billion, less/plus, only because I know it was called stimulus, but if you look at the $789 billion, you're only maybe talking about one-third was true stimulus. A third was gapping state deficits; a third was unemployment insurance and keeping some state and local employees -- police, fire, teachers -- onboard, so obviously that's critically important, but I'm not sure I would call that stimulus. When I think of stimulus, I think of growth.

And then, if you look at the third that was stimulus, it was really infrastructure, which a lot just doesn't happen overnight. I mean, I think the part of infrastructure, it's like a five-year plan. Some were truly shovel-ready, but as we know some were not shovel-ready. So I would have liked to have maybe separated it out and be a little bigger, but what I hear -- like I said -- I wasn't at the table, is that the idea of getting something with an 8 handle or larger was not going to happen.

Because?

Because I just think there wasn't the political wherewithal to do something of that type of size.

And who was making which argument? I mean, who were the political realists?

I'm not sure at the end. My guess is some people in the administration probably had a little more Keynesian tone to themselves, and some felt like, "You'll just never get this passed," maybe a little more practical approach. I think either way -- I don't know what the exact numbers are, but I think some people quote that it led to north of a million jobs being saved during that time, and it certainly stemmed the tide for state and local municipalities from having to, I would say, even cut to a more austerity budget than they already did. ...

And the reason why there was some debate within the group, [among Council of Economic Advisers, 2009-2010, Christina] Romer and Summers and others, that maybe it would be a good idea to send a message, and Citigroup is a mess and has been a mess for a long time, maybe the weaker banks should be looked at as possibly takeover candidates?

I don't know about all the different perspectives that were taking place, what Christina's view was versus Larry's versus Tim's versus the president's versus Austan's. My guess is they had very heavy debates on that. But I do think at the end of the day you don't take nationalizing one of the top five largest institutions in the country that is in over 100 countries, that's intertwined in so many different ways, and say, "OK, let's nationalize," and not [be] sure what [will happen]. Like I said, Citi or whoever it may be, UBS, all the different firms, we are in 25 to 50 jurisdictions, so when you make that type of statement you need to know local laws; you need to know how the derivatives are going to be handled; you need to know how the debt holders are going to be handled. So it's not something that's so easily done, which is why today the large institutions will have living wills, and there will be a resolution authority to understand how you wind down those that were deemed "too big to fail" institutions.

I think that what we learned from Lehman and that scenario is that we as an industry did not have the right tools, the regulators did not have the right tools, and we all needed to move there quickly to get the right tools. And I think Secretary Geithner saw that.

There's another meeting, a March 27, 2009, meeting. I don't know if you were involved in that, but that's where the 13 bankers --

I was not there.

All right. So the 13 bankers go to Washington, and the president gives this bit of a speech saying, "I'm the one between you and the pitchforks." Explain the necessity to lay down the line, though also I think what the bankers came away from understanding with that is that he's always working with them rather than against them. Describe how that was sort of viewed, either from the Obama point of view or from the bankers' point of view, of how the relationship with Obama was evolving, and this was a tenuous point where they weren't quite sure where the administration was going. What was the perspective, from your point of view, of both sides?

I'm trying to think how to answer that. I'm not sure I have a good answer for that point. I would have a good answer for the relationship of financial services with the White House, but not at that point in time.

Before or after?

After.

Well, give it to me now -- how that evolved and where we are now.

I think the relationship between our industry, the financial service, and the White House, I would say they have their good days and they have their not-so-good days. I would say for the most part, the industry supports major portions of the Dodd-Frank bill. They understand that there's a need for derivative transparency. They understand that there is a need for a systemic regulator. They understand the resolution authority. There would probably be more debate on the Volcker Rule [of Dodd-Frank] and also more debate on the Consumer Financial Protection Agency [CFPA]. But I think in general you would get the industry to say it's OK that we change some regulation.

I think from the White House perspective, what happens is the industry lobbies for those pieces they don't like. So they may not like 1 percent of a piece, but if you have a lot of different firms lobbying that 1 percent, it seems like they're lobbying a lot of different parts of the Dodd-Frank bill, so it has put a bunch of things on stall.

From that perspective, I think that the president wants a vibrant financial services industry, and the financial service wants a Dodd-Frank bill that they think is smart principles, that allows them to have their entrepreneurial spirit and allows us to service our clients the appropriate way. My guess is during the negotiation phase it's always not easy to strike the exact right balance. These conversations are not always that easy for me.

I like to joke and say I'm the Wall Street friend of the president, so part of this country may not like me because they don't like him, and those who like him may not like me because I'm on Wall Street. On the flip side, I think smart regulation works well, and I think that's where we need to get to, and I think a major part of Dodd-Frank makes a lot of sense, and the sooner we come to clarity on the direction it's going, I think we'll certainly figure out how to work within the system.

So in November of '09, in the presidential Economic Recovery Advisory Board, you're in the meeting with Volcker, where he's talking about the idea that he wants to try the Volcker Rule. Why? Why does he come to that conclusion?

How do you know I was in that meeting?

It was written about someplace or other.

OK. It's probably under public domain.

I'm not getting anything that's not public domain. What's your thinking about that, what you advise and why you think the president made that decision?

There was obviously a lot of debate about what has come to be known as the Volcker Rule. As a member of the President's Economic Recovery Advisory Board, one of the subcommittees was financial regulation. There were other subcommittees. I was on that subcommittee. I was also on the infrastructure subcommittee. There was an education subcommittee, an energy subcommittee.

And one of Paul's views [was] if you're going to have the full faith and credit of the government or be an institution -- he'll say it differently -- that's too big to fail, then you need to look at how you take your risks differently than the firms that don't have the backing of the government. Whether it's the ability to use a discount window, the Fed window or FDIC [Federal Deposit Insurance Corp.] insurance, whatever it may be, if you're one of those firms using the government to help support where you fund yourself, then there are certain products and services you should not be doing within the firm. And he was clear.

From where I sat, Paul was not going back to Glass-Steagall, so this was not going back to that type of scenario. What Paul's view was was really about the idea of principal risk, and it's fine to take principal risk if it's for your client, but if you're taking principal risk to compete against your client, well, why is that fair? And his view was -- and I'm sure when you interview Paul he'll say it differently -- but his view is these institutions are 25, 35 times levered, and the reason you can be levered so much is because of how you're viewed and the government support you get with the Fed window and the FDIC insurance., so where he'll say, "Hey, a hedge fund is 1.5 times levered, and why should you guys be in the same space when you can use your leverage differently?"

So Paul's view was that banks who were bank holding companies should not be able to be their own hedge fund and should not be a private equity fund. His other thing was why should firms go buy chemical companies or media companies when literally their space is in financial services? Why is that good for the client who you're supposed to be serving? And so I think there was a lot of debate. Certainly the debate has grown from there, but the debate was how should you use your principal risk? And if you're going to be in a delevering environment, shouldn't your principal risk be used for the client?

And I think that was the debate, and I understood Paul's perspective, because I'm in a firm that really doesn't do private equity, because our view was it was an inherent conflict with our clients, and on the hedge fund side I'm of the view we should give our best ideas to the clients.

And that was your advice? What was your advice on it?

Well, my advice was let's not think that we're going to back to Glass-Steagall, let's not think that the banking industry is agency-only; it has to be a principal-run business. We issue stock for companies; we issue debt for companies; we have to support that clients come in to buy and sell. So if you're thinking we need to go to an agency and broker industry only, that doesn't work. But I do understand that there can be a real debate on does an investment bank need to have a hedge fund, or does it need to be in private equity?

I mean, if we were being very clear, there's 800 banks, and my guess is 795 of them don't do private equity and don't have an internal hedge fund. So if you're looking at the overall industry, certainly that's a debate that makes sense to have.

But why didn't Geithner and Summers agree with the Volcker Rule?

I think you'd have to ask them why they had their problems with the Volcker Rule. The discussions I had [were] really looking at the principles of the Volcker Rule, not whether -- I wasn't one that was in the line-in-the-sand discussion.

Right. But I mean, is there a big philosophical worry that they had that gave them a reason to sort of say: "Wait a minute. Maybe this is not the right time"?

When people were talking about the Volcker Rule -- and it still is today -- there's a nervousness that it's being said that our industry is going back to Glass-Steagall, and there's a nervousness that's saying, "Well, we can't take principal risk." I haven't seen the rule writing of the Volcker Rule completely yet -- it's still being written -- so I would like to think that what they're saying is, "Of course we can take principal risk that's client-directed." ...

But some will argue that we missed the opportunity, the only opportunity you're going to get unless there's another disaster to change the system more dramatically.

When they say that we missed the opportunity to change the system more dramatically, I'm not sure I agree with that. We live in a dynamic system, changes every day. Whether there's a war or there's an energy crisis or there is discussions on education and immigration, there's going to be a political campaign and debates coming. Every day our industry changes based on the workings around us. You can read the front page of the newspaper. My guess is 75 percent of the stories impact our industry in some way.

So, to me, we're always in a changing history. If people think that, well, the administration missed their chance to change the industry in a more hardened fashion, I don't agree with that. I think that they looked at the industry and said, "OK, what are the real problems that this industry needs to rectify most quickly?" And I think that those were leverage, i.e., real capital, the equity; those were making sure we understand what's on our balance sheet -- so, whether it's the Level 3 assets or the derivatives -- and making sure we had the right transparency, and making sure we were servicing our clients the appropriate way.

I think that we understand that's the direction we're going, and as we continue to go that way I think our industry will be better for it. So I don't think it's an idea of we need to all of a sudden have a 180-degree turn of our industry. Our industry does a lot of great things. Our industry got in a situation where we were highly levered at a time where there was not a lot of liquidity, and we had to change. And, unfortunately for our industry, part of the change was the action of more government involvement using their capital. And once you use government capital, that's a major change for our industry. And our hope is that the regulations move quickly, we will abide by them, and then we're back in business as quickly as we can get. ...